a report on the impact of transport cost on latin american trade by IDB

Latin America/Caribbean and Asia/Pacific Economics and Business Association An initiative of the Inter-American Development Bank and the Asian Development Bank Institute

Fourth LAEBA Annual Meeting Lima, Peru – June 17, 2008

A report on the impact of transport cost on Latin American Trade

Mauricio Mesquita Moreira, Christian Volpe and Juan Blyde – IDB

Sponsored by InterAmerican Development Bank Integration and Trade Sector Institute for the Integration of Latin American and the Caribbean (INTAL)

Mauricio

Motivation Trade policy in the region has been all too focused on removing tariffs. “Trade facilitation” was squeezed out of the trade agenda, particularly transportation. If this neglect was not too costly in the 1980s, because the sheer magnitude of the policy barriers, it has rapidly become so in the last two decades. Transportation costs has acquired an unprecedented strategic importance to the region: – the very success of the trade reforms; – the growing fragmentation of production and time-sensitiveness of trade; – the emergence of vastly labor intensive and resource scarce economies; – Oil shock .

Objective To contribute to a better understanding of the importance of transport costs (TCs) for LAC trade. More specifically: a) How do TCs compare to tariffs? b) How do LAC TCs compare to those elsewhere in the world? c) How “transport-intensive” are LAC exports? d) What are the main determinants of LAC TCs? e) What is the TC impact of on LAC trade?

Data ALADI’s (Latin American Association of Foreign Trade) : value and

quantity of imports, tariff revenue and transport costs (freight and insurance), 5000 products, mode and port of entry (Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela) for 1990 and 1995 and from 2000 to 2005. The U.S. Census: 17,000 “products” (10 digit level, HS system), on imports (value and weight), tariff revenue, transport costs (freight plus insurance), by mode and district of entry (air and ocean) for all exporters to the U.S. The U.S. Waterborne databanks: port of origin and port of entry. Compairdata, ICAO, Airportcitycode.com, Portualia.com. and Shipanalysis.

Main Findings For most sectors and markets, countries in the region face transport costs that are significantly higher than tariffs; LAC transport costs tend to be higher than in the developed world, largely because of deficiencies in ports and airports and weak competition in shipping services; Although ocean freight expenditures seems to be converging to developed world standards, the opposite seems to be taking place with airfreight and; Reductions in freight costs can have a significant and larger impact than tariff liberalization on both volume and diversification of LAC’s trade.

Transport Costs vs. Tariffs

Figure 2 - Ad-Valorem Freight and Real Tariffs for Intraregional Exports and Exports to the U.S. Selected LAC Countries. 2005

Freight versus tariffs

Diagonal

BOL

CHL

ECU ARG BRA ARG COL VEN PER PRY CHL BOL BRA URY VEN MEX PER COL MEX

URY

ECU

LAC

Ad-valorem freight (%)

PRY

Real Tariff (%) Note: Graph is based on import data from export markets. Freight is the ratio freight expenditures to imports. Real tariffs is the ratio of tariff revenue to imports. Intraregional exports includes Brazil, Argentina, Chile, Peru and Uruguay. See Table A.2 in the Appendix for the raw data. Source: Own calculation based on US Census Bureau and Aladi Data.

Are LAC TCs too high?

Figure 4 - Total Air and Ocean Freight Expenditure as a Share of Imports

International Comparison Manufacturing

Agriculture COL

PER

COL

CHL

URY CHL

7 6 4

URY BRA

4 5 Ad-valorem Airfreight (%)

BRA ARG

ARG

URY COL

PER

BRA

ARG

CHL

10 20 Ad-valorem Airfreight (%)

Note: Freight includes insurance. Goods Categories follow WTO-SITC Classification Countries: Peru (PER) , Argentina (ARG), Brazil (BRA), Uruguay (URY), Colombia (COL) and Chile (CHL) Data source: U.S. Census Bureau and ALADI

Ad-valorem Airfreight (%)

Mining

Ad-Valorem Ocean Freight (%)

U.S. versus Selected LAC Countries by Mode and Category of Goods. 2005

Figure 6c- Ratios Between LAC and China's Export Freight and Distance to the U.S.

International Comparison Manufacturing Goods. All Modes. 2006

ECU GUY ARG CHL URY DOM BRA PAN GTM VEN CRI HND PER NIC TTO JAM SLV COL BRB BLZ MEX SUR

Freight ratios Distance ratios

1.5

LAC-China Ratio

Note: Freight ratios are based on simple average ad valorem freight rates of similar products (10 digit HS) Distance ratios are based on the average distance between the U.S. and the countries' main ports. Manufacturing defined as in the WTO- SITC classfication. Source: U.S. Census Bureau

Are LAC TCs converging?

Figure 9-Trend in Export Airfreight to the U.S. after Controlling for Trade Composition. Selected LAC Sub-Regions, China and Rest of the World (ROW). 1994-2006. 1994=100 Caribbean

120

f ln v

k ijt k ijt

WGT ijtk k = β 0 + β 1 ln + + + e kijt y α j k t V ijt

Central America Andean

100

Mercosur&Chile ROW China

Ad Valorem Airfreight. 1994=100

140

International Comparison

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Note: Airfreight is freight plus insurance as a share of imports. It was estimated by regressing ad-valorem freight on the weigh-to-value ratio of the goods imported and on year and partner-good fixed effects. See text for details. Data source: U.S. Census Bureau

Figure 7-Trend in Import Airfreight after Controlling for Changes in Trade Composition.

f v

Uruguay

k ijt k

= β 0 + β1 ln

ijt

k ijt

WGT + k V ijt

y +α t

k ìj

+ eijtk

Brazil

100

Chile

U.S.

Colombia Peru

Argentina

Ad Valorem Airfreight. 1995=100

110

U.S. and Selected LAC countries. 1995-2005. 1995=100

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Note: Airfreight is freight plus insurance as a share of imports. It was estimated by regressing ad-valorem freight on the weigh-to-value ratio of the goods imported and on year and partner-good fixed effects. Data for LAC countries is only available for 1995 and 2000-2005. See text for details. Data source: ALADI and U.S. Census Bureau

Are LAC exports transport intensive?

Figure 13 - The Impact of Time Costs and Weight on LAC's Revealed Comparative Advantages. U.S. Market. 1994-2006

International Comparison

Weight-to-Value Ratio

Time Cost per day

GUATEMALA** NICARAGUA** EL SALVADOR** JAMAICA** D. REPUBLIC** COSTA RICA** HONDURAS** COLOMBIA** TRINIDAD & TOBAGO* BOLIVIA^ ECUADOR* VENEZUELA* PERU^ ARGENTINA^ MEXICO** CHILE* CHINA** URUGUAY* PARAGUAY^ BRAZIL**

VENEZUELA** TRINIDAD & TOBAGO** BRAZIL** MEXICO** CHILE** ARGENTINA** ECUADOR* COSTA RICA^ CHINA^ COLOMBIA^ JAMAICA^ PARAGUAY^ PERU** D. REPUBLIC** GUATEMALA** HONDURAS** NICARAGUA** EL SALVADOR** BOLIVIA** URUGUAY**

-.2 -1

-.5

Impact of Comparative Advantages (elasticity)

Impact on Comparative Advantages (Elasticity)

* significant at 5%; ** significant at 1%, ^ not significant

Note: The Impact figures are coeficients of a regression of revealed comparative advantages on time costs and weight-to-ratio with controls. See text for details.

x x

k US _ jt k US _ Wt

x x

US _ jt

US _ wt

β + β lnτ 0

k W us _ j + β ln k + a t + a k + e ijtk 2 v us _ j

Figure 14 - Time Costs to Export and Trade Costs to Export to the U.S.

International Comparison

PER

NIC

VEN CRI CHL

GTM

JAM HND

URY

SLV

PRY

ARG

MEX

COL

BOL TTO ECU

Tariff Equivalent Time Cost to Export (%)

Selected LAC and East Asian Countries. 2006

BRA

GUY

PAN

Ad-Valorem Trade Costs to Export to the U.S. (Freight+Insurance+Applied Tariff) (%)

MSUR & Chile

Central America

Andean

Data Source: Hummels and Schaur 2007 and Doing Business 2007

Mexico

The Caribbean

What are the determinants of LAC TCs?

The Determinants Using very detailed data on ocean and airfreight rates paid by U.S. and LAC imports coming from countries around the world as well as data from several other sources for 2000-2005. Determinants of Ocean Freight Rates Weight-value Distance Volume of Imports Trade Imbalance Containerization Number of Shippers Elasticity of Import Demand Tariff Rate Exporter Port Efficiency Importer Port Efficiency

Expected Sign (+) (+) (-) (-) (-) (-) (-) (+) (-) (-)

Fijkt WGTijkt + β2 lnDISTij + β3 lnqijt + β4TimbIt + β5Tijkt + β6 lnnij + β7 lnλIkt + β8 lnσk +φi +θ j +γ k +τt +eijkt ln = β0 + β1 ln Vijkt Vijkt

Figure 2.4: Decomposing Differences in Ocean Freight Rates Between LAC and the Netherlands Exports to the U.S. (2000-2005) 176%

Weight to value

75%

146% 60%

45% Port Efficiency

86%

30% 56% Number of shippers

26%

15%

Volume ContainerDemand ization elasticity

-4%

Trade Tariff Imbalance Distance

-34%

-15% LAC shipping costs relative to Netherlands

Contributions of determinants

Contributions

Shipping Costs

116%

Figure 2.5: Percentage Reductions in Ocean freight import rates from a Change in Port Efficiency, Tariff Rates and Number of Shippers to U.S. Levels. Base year 2005. 45%

40%

35%

30%

25%

20%

15%

10%

0% Peru

Ecuador

Port Efficiency

LAC

Tariff

Uruguay

Chile

Number of Shippers

Brazil

What is the TC impact of on LAC trade?

The Impact For Each Sector: Determinants of Bilateral Imports/Exports at the Product Level Bilateral Trade Costs at the Product Level (-) Bilateral Distance (-) Permanent Importer Specific Characteristics Permanent Exporter Specific Characteristics

lnM cdz = λc + λd + λk + βln(τ cdz + f cdz ) + δ ln Dcd + ε cdk 9A 10 per cent reduction in trade costs would lead approximately to a 50 per cent expansion of bilateral imports. 9A 10 per cent decline in average transport costs would be associated with a 9 per cent increase of the number of products imported and with an expansion of more than 10 per cent in the number of products exported to the region.

5 4 3 2 1 0

Reductions in Transport Costs and Tariffs and Median Response of Sectoral Exports to US

ARG

BOL

BRA

CHL

COL

PER

PRY

URY

Reduction 10% Freigth

Reductions in Transport Costs and Tariffs and Response of Export Diversification in US

Reduction 10% Tariff

ECU

ARG

BOL

BRA

CHL

Reduction 10% Tariff

COL

ECU

PER

PRY

URY

Reduction 10% Freigth

Conclusions 9 9 9 9

The case for expanding the scope of the regionâ&#x20AC;&#x2122;s trade agenda, with transport costs at its very center, seems very clear. The areas the focus are the quality of the infrastructure and competition in transport services (regulatory framework). We see, though, some important political and technical challenges. On the political side, lies on turning the often mundane and invisible details of the transport network into something that can be perceived by politicians as generating political benefits. On the technical side, there are: a) the well-know risks of a â&#x20AC;&#x153;big pushâ&#x20AC;? towards transport infrastructure being interpreted as license to pursue any project; b) The stringent fiscal and financial constraints that beset most governments in the region; c) The implementation of regional transport projects that involve two or more countries, which are plagued with externalities and coordination failures.